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Quarterly Journal of Economics Vol. 114 No. 2 1999

State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output

Michael Dotsey1,2; R. G. King3,2; A. L. Wolman1,2

1 Federal Reserve · 2 Federal Reserve Bank of Richmond · 3 National Bureau of Economic Research

Abstract

Economists have long suggested that nominal product prices are changed infrequently because of fixed costs. In such a setting, optimal price adjustment should depend on the state of the economy. Yet, while widely discussed, statedependent pricing has proved difficult to incorporate into macroeconomic models. This paper develops a new, tractable theoretical state-dependent pricing framework. We use it to study how optimal pricing depends on the persistence of monetary shocks, the elasticities of labor supply and goods demand, and the interest sensitivity of money demand.

DOI
10.1162/003355399556106
Volume
114
Issue
2
Pages
655-690
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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